Problems facing coffee producers

For some of the world’s Least Developed Countries, such as Burundi, the cultivation of coffee accounts for the majority of foreign exchange earnings, up to 80%.

Coffee is big business and remains one of the most valuable primary products in world trade. However, for many of the world’s 25 million coffee farmers, coffee is a labour intensive crop that frequently yields very little financial return.

Coffee is also enormously valuable to the economies of many developing countries. For some of the world’s Least Developed Countries, such as Burundi, the cultivation of coffee accounts for the majority of foreign exchange earnings, up to 80%. Most of the coffee-dependent workers worldwide are in developing countries, especially Brazil, Vietnam, Colombia, Indonesia and Mexico, the largest exporters of coffee.

High price volatility

The history of coffee on the world market has always been characterized by its high price volatility. This volatility prompted international governments to negotiate the first International Coffee Agreement to stabilize the coffee market in 1962. Quotas were introduced so that excessive coffee supplies were withheld from the market and coffee consumption was promoted.

Unfortunately, negotiations for the 1989 version of the International Coffee Agreement collapsed, causing coffee prices to drop to less than 80 US cents per pound. It took until 1994 to negotiate a new International Coffee Agreement, but it was decided that coffee prices would no longer be regulated. That same year frost in Brazil threatened crops and the price of a pound of coffee escalated to a high US$2.80 per pound.

Coffee crisis

But the high was temporary. In October 2001 a thirty year low was to devastate farmers . In what is now known as the ‘Coffee Crisis’ coffee prices fell to an extreme low of US$45 cents per pound. Almost overnight international prices crashed. Hundred of thousands of farmers from the rainforest of Peru to the steep slopes of Kilimanjaro were forced out of business. It was yet another reminder of just how vulnerable coffee farmers are to the volatile international market and its wildly fluctuating prices.

This crisis resulted mostly from an overproduction of coffee. Vietnamese farmers were cultivating huge amounts of lower quality Robusta coffee, encouraged by the International Monetary Fund who had instructed the Vietnamese government to subsidize production. The world market price of high quality coffee was dragged down by the rising supply of low quality coffee.

Vietnam’s overproduction also coincided with a drastic increase in Brazil’s coffee production. This caused supply to far exceed demand.

Due to the four years it takes for a coffee plant to yield fruit, it is extremely difficult for farmers to respond quickly to the fluctuating market.

In 2002 eight percent more coffee was being produced than consumed, and much of it was low quality. The result of the Coffee Crisis was economic devastation for many coffee-producing countries. Over 100 million growers, processors, traders and retailers dependent on coffee were affected. Citizens of coffee export dependent countries in Central and South America, Africa and Asia had to endure drastic cuts in health and education spending by governments, and many endured near starvation conditions.

Benefits of Fairtrade for producers

Fairtrade Standards for coffee act as a safety net against the unpredictable market. They provide security to coffee producers so that they will get a price that covers their average costs of sustainable production.

You can click on the links below for comparisons between Fairtrade Minimum Prices and Market Prices:

Fairtrade Standards for coffee

Among other things, Fairtrade Standards for coffee production include the following:

Producer organizations are paid a floor price (Fairtrade Minimum Price) of US 1.40 per pound for Fairtrade certified washed Arabica and US 1.35 for unwashed Arabica, or the market price, if higher.

For Fairtrade certified organic coffee an extra minimum differential of US 30 cents per pound is being applied.

A Fairtrade Premium of US 20 cents (with USD 5 cents earmarked for productivity and quality improvements) per pound is added to the purchase price and is used by producer organizations for social and economic investments at the community and organizational level.

Fairtrade coffee certification is currently only open to small farmer organizations. Small farmers must be organized in organizations which they own and govern.

Democratic decision making is required. Everybody has equal right to vote.

Environmental standards restrict the use of agrochemicals and encourage sustainability.

Pre-export lines of credit are given to the producer organizations. If requested, up to 60 % of the purchase price should be pre-financed to the producer organizations.

Trade standards aim to encourage fairer negotiations, clarify the role of price fixing, and reduce speculation

Guidance Documents for Fairtrade producers and buyers

Fairtrade International offers the following guidance documents as a complement to the Fairtrade Coffee Standard.

Guidance on Productivity and Quality Improvement

The following guidance document on productivity and quality improvements describes best practice in making investments with the 5 cents USD per pound of the Fairtrade Premium that is to be allocated toward investments in productivity and/or quality of Fairtrade Coffee.

Guidance on Price Risk Management

The following guidance document on price risk management strategies is also a tool for producers, and traders, to help them manage price risk, especially in the current context of high market price volatility.